Column: A whole new minefield

SummaryTill there is fresh competition, it is not clear as to what the new coal regulator will be regulating

Till there is fresh competition, it is not clear as to what the new coal regulator will be regulating

Amendments to the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act), and Coal Nationalisation Act, 1973, have been a minefield of controversies over more than a decade. There have been many attempts to amend the Coal Nationalisation Act, to bring private players in this field—looking at the need for enormous capital, but the politics of the day have prevented this in all kinds of political regimes.

Increasing demand for coal by power and steel sectors, and Coal India’s inability to supply efficiently, led to amendments in Coal (Nationalisation) Act to bring in private capital, and provide captive mines to these users. Over time, captive coal blocks were allotted to power and steel sectors. The system worked satisfactorily. A realisation of huge profits from such mines, and even from the most unviable mines of Coal India allotted to private players (such were the inefficiencies of the erstwhile coal monopoly), and an increase in domestic demand and a phenomenal increase in international prices over last decade prompted private players rushing for such mines. An exercise for getting such mines allocated from the government became the primary purpose of such companies, and the purpose of steel-making and producing power by such companies became secondary. There was also a scramble for selling surpluses from such mines, which was not allowed or was severely restricted in the rules earlier, that led to all kinds of illegalities.

During the mad rush, and even earlier, for allocation of coal mines due to increasing demands from both genuine and some non-genuine persons, the government started contemplating, in early 2000s, auction as a basis for allocation. The problem was that the MMDR Act, which provided for allocation of mines both for private and public players, did not contemplate auctions. The government then started examining whether auction required amendment to the Coal Nationalisation Act or the MMDR Act, 1957, or both.

Somewhere in 2004, the then coal secretary wrote that no amendment was necessary, and that it could be done by an administrative order. Some stakeholders did not support this and allocation by the old process continued. Later, sometime in 2006, the law ministry also said that this could be done by an administrative order, and that the allocation of mines would then be governed by the Contract Act. Again, there were differing opinions amongst stakeholders who were not reconciled to the idea of “auction” as a basis for allocation, leading to the debate continuing even today. In 2010, the government could finally manage a minor amendment to Section 10 of the MMDR Act, 1957, which allowed allocation of coal blocks by “auction”. The proposed amendment draft of the MMDR Act is still under consideration, and perhaps due to this reason the auction option has not been tested, there being many ‘open’ issues due to non-passing of the new proposed MMDR Bill, 2012.

The CAG smelt a scam in the way allocation of coal blocks was done by the government pending the adoption of “auction” as the basis for allocation, and came out with a report indicating a huge loss to the government. This shook the establishment and Parliament alike. The scam was named Coalgate, and has led to almost all captive exploration being halted, and the country adopting the much more expensive option of importing coal from other countries. Some of the exporting countries used our policy paralysis to exploit us by imposing an export tax, and we are forced to pay a huge price, despite having more than abundant resources of coal in the country, some of which had been trapped earlier between ‘go’ and ‘no-go’, and many other similar remediable restrictions, thus helping exporters to India and definitely not us.

To counter the criticism, the Cabinet cleared the setting up of a coal regulator last week. A draft Bill was prepared by the ministry concerned. The coal regulator will neither have authority to fix prices for transfer/sale of coal nor give authorisations to start approved mines. While these amendments are welcome as they do not create more bottlenecks than in the current scheme of things, there are still many problems. As per this Bill, the coal regulator (1) will determine the principles for price fixation, both for Coal India and for captive mines; (2) will deal with disputes between mine owners and power/producers relating to quality, testing, transport etc; (3) will also decide on the rules for selling surpluses from captive mines, and the price thereof; and (4) will also determine the price and the principles for determining royalty payable to state governments by first determining the transfer price and selling price for captive mines. Though the Act does not say so, this will perhaps help in fixing ad valorem price and fixation of royalty on coal prices. Since auction of mines has been permitted by the 2010 amendment, perhaps the transfer price of such coal will help in removing disputes between coal producers and power and steel plants. Many of the functions vis-à-vis coal mines are given to the coal controller. It is visualised that the coal controller would be subordinate to the regulator. Of course, there would be an appellate body to the coal regulator.

The Bill in the current shape will create more problems than it would solve. A regulator is normally justified for creating regulations that bring in a level-playing field and more competition in the sector. Unless the Coal Nationalisation Act is amended, this would not be possible. Hence this regulator will only determine the principles of price and quality determination, and if the user disputes the calculation by the producer, the regulator will settle these disputes till they are finally resolved by the appellate body and courts. These actions are already within the purview of the government and the regulator/appellate body/courts to oversee a public sector and captive coal price determination function, with the government having the powers to issue policy directives will only delay the processes. With auction being the future mode for allocation of captive mines, the imposition of someone determining the price fixation role for such mines will be totally inconsistent, especially in a market where coal is tradeable. Will the coal regulator in the current form not lead to different prices for different mines, and thus lead to massive corruption in the market with traders having formal and informal prices for traded coal, and the government not being able to control market prices, having already done away with the Essential Commodities Act being applicable to coal.

It is quite possible that the government is contemplating the setting up of an office of the coal regulator for the post denationalisation period. An experienced coal regulator can then immediately takeover the level-playing field/competition functions, with minor amendments in the Act. If that is so, the action is commendable. In the meantime, it is advisable that the function of increasing competition is given to the regulator after breaking Coal India into many companies, and asking the regulator to ensure fair and healthy competition between these companies. It is true that China’s model of liberalisation survives by ensuring healthy competition between different public sector companies, e.g. in the telecom sector.

Pradip Baijal is former Special Secretary, Power Ministry. PC Gupta is former Chairman, NMDC